By Richard M Langberg
Standard & Poor's
NEW YORK -- S&P Global Ratings said today that its 'B-' corporate credit ratings on U.S. refinery company CITGO Petroleum Corp. and CITGO Holding Inc., a U.S. holding company that owns PDVSA's interests in CITGO Petroleum, are unchanged. The ratings remain on CreditWatch where we placed them with developing implications on Dec. 7, 2017.
Our 'B+' issue-level rating on CITGO Petroleum's senior secured debt is also unchanged. The recovery rating on the debt remains '1', which indicates the likelihood of very high (90%-100%; rounded estimate: 95%) recovery following a default. Finally, our 'B-' issue-level rating on CITGO Holding's outstanding senior secured debt due 2018 and 2020 is unchanged. The recovery rating is '3', reflecting our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery in the event of default. The issue-level ratings remain on CreditWatch with developing implications where we placed them on Dec. 7, 2017.
CITGO Petroleum owns three refining assets with a combined nameplate capacity of 749,000 barrels per day--two in the Gulf Coast and one near Chicago--that have collectively the highest complexity ratings of all U.S. refiners.
Petroleum also owns and operates an extensive distribution network of 33 refined product terminals with a storage capacity of 8.9 million barrels in the eastern and upper Midwest regions as well as having equity ownership of an additional 10 terminals with 3.9 million barrels of storage capacity and supplies fuels to about 5,300 branded (but independently owned) retail gas stations in the eastern and upper Midwest regions of the U.S.
The 'B-' rating on CITGO is a result of our assessment that CITGO is an "insulated subsidiary" of PDVSA under our group rating methodology. In cases where the rating on the parent is in the 'CCC' category (or lower as it is here), our group rating methodology caps the rating of the insulated subsidiary at 'B-' if we believe the subsidiary will not be included in a potential bankruptcy of its parent. The rating of an insulated subsidiary is usually one notch above the rating of the parent, so the rating on CITGO will not go up, absent any change in ownership, until PDVSA is rated at least 'B-' itself.
Our ratings on CITGO would likely be higher were it no longer owned by PDVSA.
This is represented by the stand-alone credit profile (SACP) or 'b+', which is S&P Global Ratings' assessment of CITGO's creditworthiness absent any impact from the credit quality of its owner.
CreditWatch with developing implications means that there is a high likelihood of a rating action, either negative or positive, within the next 90 days.
Events that would lead to a negative rating action would include PDVSA seeking bankruptcy protection that a court agrees must include CITGO or the government of Venezuela taking an action that has a negative impact on the operational capability of CITGO, such as forcing an asset sale that alters the cash flow profile of the company. While the relevant credit documents governing CITGO's debt greatly limit any sale of assets and payment to PDVSA of the resulting proceeds, PDVSA's 100% control of CITGO and extremely difficult financial position provide incentive for PDVSA to try to monetize assets at CITGO in some way.
Given the immediate need for cash in Venezuela, there is a chance that PDVSA may seek to sell CITGO, which would lead to an upgrade, at least to its current stand-alone credit profile of 'b+' and potentially higher depending on the linkage between CITGO and the buyer.
Given the overhang of PDVSA's ownership and the current political situation in Venezuela, we believe that there is a somewhat great likelihood of a negative rating action than a positive one. However, it is important to stress that it is difficult to know with any certainty what is happening in Venezuela, the motivations of the relevant parties, and any potential end game.